AutoNation Is Running at High Speed

by Lawrence Meyers | April 23, 2013 9:49 am

AutoNation Is Running at High Speed

Car dealers have been having a good time since the economy bottomed.

Buying a car is one of the first things people do when they feel their economic situation improving. And as Americans feel better about their finances, they’ve started pouring money back into the auto industry. One of the biggest winners of this trend so far has been AutoNation (NYSE:AN[1]).

This $5 billion company operates 265 stores, primarily across the Sun Belt. But rather than just selling cars, AutoNation has a lot of ancillary revenue in its business. The company offers not only both new and used vehicles, but also parts, automotive repair and maintenance services, and high-margin automotive finance and insurance products, often through third-party finance sources.

This broad diversification gives it exposure to all parts of the industry and also provides a hedge during lean times. The company is thus able to leverage its balance sheet because it can finance vehicles at high rates and play the arbitrage.

AutoNation just reported a 10.8% increase in revenue on a 9.2% increase in new vehicle sales and 9.9% increase in used sales, not to mention an EPS increase of 21.4% and a 13.2% increase in net income. The company is estimated to see 19.8% annualized earnings increases over the next five years.

That is fantastic growth in this sluggish economy. It’s also worth noting that this EPS increase came in a quarter when the company only repurchased 100,000 shares as opposed to the 11.7 million shares it bought in the previous year’s quarter. (Which means organic EPS in last year’s comparable quarter were lower, and the organic increase this year would be even higher.)

There were many standouts in this report. Pickup truck sales were up 18%. The F&I revenue increased 19.5%. And premium vehicles, like BMWs and Daimler‘s (PINK:DDAIF[2]) Mercedes, saw revenue increase 14.7% on unit sale increases of 16.2%.

The company’s CEO also made some interesting points about competition from electric vehicles — namely, that there really won’t be any from the likes of Tesla Motors (NASDAQ:TSLA[3]). Electric vehicles are too expensive, their range is nowhere near that of gasoline powered vehicles, and there is virtually zero resale value on these cars. Without government support, he believes the industry would not even be viable.

Meanwhile, AutoNation produces robust cash flow and has a good hold on inventory. It has $46 million in cash and $2 billion in very manageable debt.

If we assign a 20x multiple to this year’s earnings of $2.89, we get a fair value of around $57. And with the stock trading at around $43, it suggests a value play for AutoNation stock.

After this latest earnings report, I’m seriously considering buying shares of this company. Everything is going in the right direction.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities, but might initiate a position in AutoNation in the next two weeks.